Residency Is Out, And Transparency Is In

The Implications of Bill 24 on NL Corporations

On November 16, 2021, amendments to the Corporations Act (the "Act") received royal assent, and the Act comes into force on April 1, 2022. The amendments seek to remove the residency requirements for directors and increase the transparency of beneficial ownership of corporations.

Director Residency Amendments

Currently, section 174 of the Act requires that at least 25% of the directors of a NL corporation be a Canadian resident. As of April 1, 2022, the requirement is eliminated. This should come as a welcome change and Newfoundland and Labrador will join many other provinces that have eliminated the Canadian residency requirement for directors of a corporation.

Transparency of Beneficial Ownership Amendments

Bill 24 also introduces new provisions to the Act with respect to individuals with significant control over the corporation. Section 45.1 provides a detailed definition regarding who will be classified as an individual with significant control. Individuals will fall within this provision if they have any of the following interests or rights with respect to a significant number of shares of the corporation:

• An interest as a registered holder of shares;
• An interest as a beneficial owner of shares; or
• Direct or indirect control or direction over shares.

Further, an individual who has any direct or indirect influence which would result in control of the corporation, or an individual to whom prescribed circumstances apply, or two or more individuals who hold or exercise any of these interests or rights jointly, may be considered an individual with significant control.

Logically, the next question is what counts as a significant number of shares? For the purposes of these new provisions, a significant number of shares are any shares that carry 25% or more of the voting rights in a corporation.

Section 45.2 will require corporations to prepare and maintain a register, known as the "Register of Individuals with Significant Control" or "ISC Register". The register will contain detailed information regarding any individuals who fall within the definition. The corporation will also be required to, at least once during the financial year, ensure that it has identified all individuals with significant control and that the information in the register is accurate, complete and up to date. However, in addition to the annual recording requirement, if, at any time, the corporation becomes aware of any information required to be recorded, it must be so recorded within a short timeframe of 15 days.

Corporations need to pay particular attention to these new provisions because a corporation who fails to abide by these recording requirements is guilty of an offence that will expose it to potential liability to a fine up to $5,000. The Act also introduces a new section, s. 503.1, whereby every director or officer of a corporation who knowingly authorizes, permits, or acquiesces in the contravention of the recording or disclosure requirements to investigative bodies is guilty of an offence and will expose themselves to potential liability to a fine up to $200,000 or to imprisonment for a term not exceeding six months, or both.

Corporations should also be aware of the extent of its potential disclosure duties. Under the new provisions, any shareholder, creditor, or investigative body may request the register of the corporation. This right to request the register is limited to the prescribed purposes summarized below, being matters dealing with:

Shareholders and Creditors:

• An effort to influence the voting of shareholders of the corporation;
• An offer to acquire securities of the corporation; or
• Any matter relating to the affairs of the Corporation.

Investigative bodies:

• Administering or enforcing a law for which the regulator is responsible;
• Assisting another agency in Canada in the administration or enforcement of law; or
• Providing information contained in the register to an agency outside of Canada to assist the agency in the administration or enforcement of laws.

As can be seen, the types of prescribed purposes to which shareholders, creditors and investigative bodies are granted is broad.

Finally, the Act currently defines an individual as a natural person, and Bill 24 has made no amendments to this definition. This is noteworthy because section 45.1 also applies to individuals with anindirectinfluence that would result in significant control of a NL corporation. This means that individuals controlling directly or indirectly another corporation, trust, or other entity, will have certain personal information held in the NL corporation's register. The impact of this on NL corporations is that it may be necessary to search through many layers of information to confirm the individuals with beneficial ownership.

Further, as previously noted, the new provisions apply to individuals in prescribed circumstances. While it is currently unknown how these prescribed circumstances will be identified by regulation, given that the goal of this amendment is to increase the transparency of beneficial ownership of corporations, one can imagine the executive authority will purposefully leave this category wide open.

While this amendment creates onerous recording requirements for NL corporations, they are not alone. This amendment mirrors the federal government requirements for CBCA corporations which came into force in June 2019. As well, to date, five other provinces have implemented similar requirements and all other provinces and territories have committed to doing so in an effort to strengthen investigations into money laundering and financing of terrorist activity.

Key Takeaways

Key takeaways from Bill 24: An Act to Amend the Corporations Act:

1. Effective April 1, 2022, Newfoundland and Labrador will no longer require that at least 25% of the directors of a NL Corporation be a Canadian resident.
2. NL Corporations should prepare and plan for the new provisions relating to the recording and corporate register requirements for individuals with significant control over the corporation. The register will require detailed information which will in turn require planning and preparation.
3. NL Corporations must be prepared to disclose information held in the register to shareholders, creditors, or investigative bodies on proper request. While the right to obtain disclosure of the information held in the register is not unfettered, corporations should be aware of their duty to comply with disclosure when required.

In conclusion, Bill 24 introduces some welcome changes to the Act, such as the removal of the residential requirements for directors. However, it also introduces potentially onerous recording and disclosure requirements for NL corporations as the burden is on them and responsible directors to ensure they have identified all individuals with significant control. This will require significant planning before April 1, 2022, when the amendments come into force. Benson Buffett is available to help NL corporations comply with these new requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.